“Stock markets moving up, bonds moving up, i.e., bonds yield moving down and the rupee moving up, all three happening together, that by itself is a good macroeconomic indicator,” says Sandip Sabharwal, asksandipsabharwal.com.

We have had a good week behind us. 4% on the Nifty, 6-7% for the small and the midcap indices. Are we likely to build on that?
Sandip Sabharwal: Probability is high that we build on that because till the negativity pervades and the rally which has come about has taken a lot of people by surprise and many people, investors domestically at least, resorted to what is also called loss harvesting where they thought that since they do not want to pay tax this year, so they sold off equities for saving tax, capital gains tax for this year in the hope of buying them cheaper.

Many of them are now sitting on cash and markets have rallied. So, fundamentally also if you see, the triple move which we have seen is very rare. Stock markets moving up, bonds moving up, i.e., bonds yield moving down and the rupee moving up, all three happening together, that by itself is a good macroeconomic indicator.

Now, the only small risk which remains is what happened on 2nd April with regards to tariffs because from India’s perspective specifically, if only the exports, the net balance gets targeted, then the impact could be lower, but then they are talking of specific US companies being targeted because of high GST and all, so that can take into internal policies.
So, how that plays out we have to see, so that will create some near-term uncertainty but directionally things look okay.

What is it that you are making of the entire power sector right now? Demand clearly has picked up in the month of February, continues to climb in March as well. The shortages were pretty much negligible and there is a lot of capacity addition as well which is currently underway on the sidelines. Anything that you are liking within the power sector?
Sandip Sabharwal: Power as sector in terms of, if you are talking about generating companies, the utilities, tends to be a low ROE business. So, if you look at the return ratios of most of these companies, they are in single digits or very low double digits in some cases, most cases single digits. So, we cannot give them very high valuations given the political risk, regulatory risk, etc, around tariffs and all also.

But like you rightly said, given that relatively harsh summer is predicted, temperatures have started rising early, so near-term demand uptick is most likely which could benefit the merchant power suppliers for the next few months and companies like IEX also could benefit because of higher price unit trading charges, higher number of amount of trading, etc. So, near term, it does represent a trading bet, I would say a short-term investment bet for investors.
So, if we spend a minute on power more, there is power generation, there is power transmission, there is power financing, there is power mechanical, meter company, transformer company, wire company, which end of the power is the best one to invest in?
Sandip Sabharwal: The suppliers tend to be the best one because transmission expansion, both in India and globally is happening at a rapid pace because a lot of the renewable additions require much more transmission investments. So, the transmission equipment company, the transformer companies look the best placed, I would say, on a directional basis.
Then, you talked of the meter companies, so many of the meter companies also because of the move towards smart meters, many of these companies also have been doing well, but the competitive intensity from new players has also been increasing, but then the overall opportunity size is pretty strong.

Generating companies, I am always sceptical because the investment they do are huge, return ratios tend to be very low. So, at most they would present trading bets or there has been a cycle of re-rating where many of these stocks have moved up. Further re-rating looks tough for me.

What is the view on the entire realty pack? And we were just talking about the antique note on DLF, they are saying that the pre-sales growth is expected to be modest going forward and that the company is focused on growth through its existing land bank with no need for new acquisition, saying that they have strong visibility for the next few years and it is a structural story, but in the near term they do think that sales perhaps are going to peter down a little bit.
Sandip Sabharwal: So, real estate has had three-four years of strong run. Now from all data which has been coming about and that is what I also talked of for the last three-four months, that sales seem to be petering down, pre-sales also are moderating, the price increases which these companies were able to do, that is no longer happening.

So, there has to be a phase of consolidation in the real estate sector because if you see, real estate demand stood up when many of the other sectors actually saw a decline in demand.

So, there is only so much of high-priced real estate which can be sold in a macroeconomic scenario where the growth is not actually very aggressive and people’s incomes are not rising very rapidly. I would think that real estate for this year I would still see should be a phase of consolidation overall rather than significant upside in most of these real estate companies, including DLF.

We have discussed it in your first comments. But I want to take this point forward and say that markets are a cycle. Extreme pessimism, markets will go up, nobody will believe it, then comes the participation phase, and then comes the overbought phase. Are we now entering what could be called as a participation phase and the market before it peaks out, it has to go to overbought positions and that could be 1000 point on the Nifty, that could be 1500 point on the Nifty, that could be 500 point on the Nifty also.
Sandip Sabharwal: Yes, the participation will come back and so many people were expecting that domestic investors into mutual funds will suddenly stop investing, they will have net outflows and a lot of people were making their bets on that, that FIIs are selling, domestic investors overall will start selling and markets will crash. I do not think that is going to happen.

Equity investing through the SIP route is now a trend sort of among the young professionals, etc, at least, and that is not going to stop. So, it is a part of asset allocation. Many of these people do not look at their values every day, which people think they do, actually they do not.

So, domestic, the flows on a net basis could vary last year, few very good months, we saw 40,000-45,000 crores of net inflows into mutual funds also. So, maybe that comes down to 20,000-25,000 crores for a couple of months, but still that is a net inflow. On top of that, if due to improved macroeconomics, better valuations, foreign investors start allocating back to emerging markets, including India, so that is added thing which will happen. So, all new moves in the market start as short covering rallies. So, people always think it is a short covering rally. It will go up and it will come back again.
Now, the jury is still out whether that will happen. I would not be negative directionally. So, maybe markets move up 2000-3000 points, then obviously then they have to give up some of their gains because that is how the markets move, they move up, then some gains are given up, and then they move up further.

So, I would think we will start that kind of cycle rather than this being just a short covering rally and then markets again crashing.

Is the best play BEL or would you say that you can diversify and broaden your portfolio within defence?
Sandip Sabharwal: So, depending on valuation of individual companies, one can. So, the only defence stock we actually own right now is BEL only because that has a more established track record. They have reported very strong earnings and order wins also.

And they are into project cycle which are, let us say, not as long term as a shipbuilding company or a company like HAL where the deliveries could be over many years, but if the government proceeds on order announcements and actually placing orders at the same pace at which they have started to go, then I think across the board, there could be opportunities.